Dietz-Britton v. Smythe, Cramer Co.

• Decision Date: 02 October 2000
• Docket Number: No. 76435 and 76455.,76435 and 76455.
• Citation: 743 NE 2d 960,139 Ohio App.3d 337
• Parties: DIETZ-BRITTON, Appellant and Cross-Appellee, v. SMYTHE, CRAMER COMPANY et al., Appellees and Cross-Appellants.
• Court: Ohio Court of Appeals

139 Ohio App.3d 337

743 NE 2d 960

DIETZ-BRITTON, Appellant and Cross-Appellee, v. SMYTHE, CRAMER COMPANY et al., Appellees and Cross-Appellants.^*

Nos. 76435 and 76455.

Court of Appeals of Ohio, Eighth District, Cuyahoga County.

Decided October 2, 2000.

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McDonald, Hopkins, Burke & Haber, Tyler L. Mathews and Thomas C. Schrader, for appellant. Climaco, Lefkowitz, Peca, Wilcox & Garafoli and Jack D. Maistros, for appellees.

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JOHN T. PATTON, Judge.

Pursuant to the terms of a legal defense program, defendant Smythe, Cramer Company, a residential real estate company, undertook the legal defense of plaintiff Judith Dietz-Britton, one of its real estate agents who had been sued for fraud in connection with a real estate transaction. Shortly before the trial in that case, Smythe, Cramer told plaintiff it would not indemnify her if she were found liable for fraud, although it would continue her defense. Plaintiff retained her own counsel and subsequently lost a jury verdict in the fraud case. Smythe, Cramer refused to indemnify, so plaintiff brought this declaratory judgment action asking the court to find the legal defense program a form of insurance and find that Smythe, Cramer breached the terms of the insurance contract. The parties filed cross-motions for summary judgment. The court found the legal defense program to be a form of insurance but held that Smythe, Cramer had no duty to indemnify for fraud or dishonesty. Plaintiff appeals that finding. Smythe, Cramer appeals the court's finding that the legal defense program constitutes a form of insurance.

The underlying facts are based on a previous lawsuit and are largely undisputed. Plaintiff represented a home seller with property located atop a steep bank running down to the Chagrin River. An engineering report prepared at the direction of the seller contained damaging information about soil instability on the property, concluding that landslides would likely occur on the property and that the leach field for the septic system should be relocated. Plaintiff originally prepared a sales brochure disclosing the existence of the report, the seller's willingness to share the report, and a notation that "verbal comments by the engineer * * * were favorable." The home buyer, John Lamb, received a copy of this brochure during an open house. Lamb returned to the house one week later for a second viewing and obtained another brochure, but this brochure did not contain the statement concerning the owner's willingness to share the report. Lamb agreed on sales terms but was unable to obtain a copy of the engineering report before closing on the house.

Just one year after buying the house, a 1,500 square foot section of Lamb's property slid into the river, exposing a portion of the septic system. In October 1991, he brought suit against both plaintiff and Smythe, Cramer, alleging that they fraudulently concealed the contents of the engineering report. We will refer to this action as the "Lamb litigation."

At the time of the Lamb litigation, Smythe, Cramer ran a legal defense program for its realtors. Effective November 15, 1990, the program provided a defense and indemnity for claims against realtors occurring after that date. On November, 20, 1990, plaintiff rejected retroactive coverage under a rider that would have covered her for claims occurring from the date she first began working for Smythe, Cramer, some twenty years earlier. Because Lamb's claim arose in June 1990 (before the November 15, 1990 starting date of the legal defense program), plaintiff made an August 1993 request to the president of Smythe, Cramer, asking him to consider extending retroactive coverage to her in light of her many years with the company and her excellent sales record. After considering the matter, Smythe, Cramer agreed to extend coverage on the condition that plaintiff refund to it her entire commission earned on the sale of the Lamb house. Plaintiff returned over $4,000 to Smythe, Cramer. Smythe, Cramer retained counsel, who defended both it and plaintiff. At no time did Smythe, Cramer reserve its rights to coverage.

The court scheduled trial for February 1996. On December 13, 1995, Smythe, Cramer met with plaintiff and, while stressing that it would continue to represent her at the trial, told her it believed that Lamb's fraud allegations fell within an exclusion to the indemnity provisions of the legal defense program pertaining to "fraud, dishonesty, criminal acts, license law or ethics violations * * *." Smythe, Cramer memorialized the discussion at that meeting in a January 4, 1996 letter from its general counsel to plaintiff. The letter stated that the "primary purpose" of the December 13, 1995 meeting "was to discuss the internal issue of whether the claim would be `covered' pursuant to Smythe, Cramer Co.'s Realtor Legal Defense Program." The letter went on to state that "these internal issues are still being reviewed by Senior Management and myself * * *." The letter concluded by noting that the "internal issues" were unrelated to Smythe, Cramer's legal representation, but that plaintiff "as an individual defendant * * * may wish and are entitled to retain independent legal counsel. If you do not retain counsel, Smythe, Cramer Co. will continue to provide you with representation * * *."

Plaintiff responded with her own letter in which she told Smythe, Cramer that she believed that "the primary negligence in this case was the mishandling by Smythe, Cramer personnel, rather than by any intentional act of my mine."

Smythe, Cramer responded to plaintiff on January 8, 1996, by pointing to evidence produced during discovery that suggested that plaintiff may not have been forthcoming with the facts when asking its president to extend coverage under the legal defense program. Smythe, Cramer claimed that it learned that plaintiff had possession of the engineering report prior to selling the house to Lamb but did not mention that fact to its president when asking for retroactive coverage under the legal defense program. The letter also stated:

"In conclusion, the evidence gleaned through discovery demonstrates that you intentionally concealed the written report. Further, it appears that you engaged in a continued course of misrepresentation by personally altering the handouts. It is Smythe, Cramer Co.'s conclusion that these actions are fraudulent, dishonest, and a violation of Ohio Real Estate license law. These activities are not authorized or condoned in any way by Smythe, Cramer Co."

At that point, plaintiff retained her own counsel for trial. Trial commenced just four weeks later on February 6, 1996. A jury awarded Lamb damages of $150,000—$90,000 against plaintiff and $60,000 against Smythe, Cramer.

Plaintiff did not appeal the judgment against her. When Lamb sought to execute on the judgment, plaintiff contacted Smythe, Cramer and requested that it pay the judgment. When Smythe, Cramer refused, plaintiff satisfied the judgment and brought this action for a declaratory judgment seeking a determination of her rights under the legal defense program. Upon cross-motions for summary judgment, the court ultimately found for Smythe, Cramer on all claims.

I

The primary issue in this case concerns the effect of Smythe, Cramer's reservation of its rights under the legal defense program and the timeliness of that reservation of rights. In framing the issue in these terms, we acknowledge, as the parties do, that there is no analogous reported law governing this issue, so general principles of contract law apply to the application of the legal defense program. See Appellee's Brief at 39. Because this is a matter concerning the construction of a written contract, we review the legal defense program as a matter of law. See Alexander v. Buckeye Pipe Line Co. (1978), 53 Ohio St.2d 241, 7 O.O.3d 403, 374 N.E.2d 146, paragraph one of the syllabus; Inland Refuse Transfer Co. v. Browning-Ferris Industries of Ohio, Inc. (1984), 15 Ohio St.3d 321, 322, 15 OBR 448, 448-449, 474 N.E.2d 271, 272-273.

A potential conflict of interest exists when an insurer assumes control of a defense for an insured but also intends to challenge its duty to indemnify if the defense is unsuccessful. Collins v. Grange Mut. Cas. Co. (1997), 124 Ohio App.3d 574, 577, 706 N.E.2d 856. The insurer may undertake a defense on behalf of an insured yet protect its position by reserving its rights under the policy. A reservation of rights consists of "notice given by the insurer that it will defend the suit, but reserving all rights it has based on noncoverage under the policy." Motorists Mut. Ins. Co. v. Trainor (1973), 33 Ohio St.2d 41, 45, 62 O.O.2d 402, 404, 294 N.E.2d 874, 877.

An insurer's reservation of rights is important because insurers often find themselves in positions that might create a conflict of interest. In some circumstances, an insurer might believe that its insured's conduct constitutes excluded conduct under an insurance policy. Hence, it may be to the insurer's financial advantage to see that the conduct is excluded, thus precluding indemnification. This constitutes a potential (though not necessarily actual) conflict of interest. See Collins v. Grange Mut. Cas. Co., 124 Ohio App.3d at 577, 706 N.E.2d at 858. Under such circumstances, the insurer is obligated to defend the action but reserve its rights to indemnification. This way, the client can make a knowing choice whether to proceed with representation and the possible conflict, or obtain independent counsel.

Section D of the legal defense program lists ten different exclusions. Subsection 1 of Section D excludes:

"Fraud, dishonesty, criminal acts, licence law or ethics violations, undisclosed dual agency, reckless, malicious or intentional wrongdoing whether by act, omission or inaction."

"Intentional...